SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998 Commission File No. 1-11166
- ----------------------------------------- ------------------------------------
The Equitable Companies Incorporated
(Exact name of registrant as specified in its charter)
Delaware 13-3623351
- -------------------------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
- -------------------------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
--------------------
None
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days.
Yes X No
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at November 11, 1998
- ---------------------------------------------- ------------------------------
Common Stock, $.01 par value 223,127,402
Page 1 of 38
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page #
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1: Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997........................................................ 3
Consolidated Statements of Earnings for the Three Months and Nine
Months Ended September 30, 1998 and 1997..................................... 4
Consolidated Statements of Shareholders' Equity for the Nine Months
Ended September 30, 1998 and 1997............................................ 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997.................................................. 6
Notes to Consolidated Financial Statements.................................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 18
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................................ 37
Item 4: Submission of Matters to a Vote of Security Holders.............................. 37
Item 6: Exhibits and Reports on Form 8-K................................................. 37
SIGNATURES....................................................................................... 38
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements.
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 21,148.8 $ 19,978.5
Held to maturity, at amortized cost..................................... 262.0 143.0
Trading account securities, at market value............................... 16,756.0 16,535.7
Securities purchased under resale agreements.............................. 20,845.4 22,628.8
Mortgage loans on real estate............................................. 2,552.0 2,611.4
Equity real estate........................................................ 2,106.5 2,495.1
Policy loans.............................................................. 2,050.2 2,422.9
Other equity investments.................................................. 1,138.3 1,276.5
Other invested assets..................................................... 1,002.0 613.6
----------------- -----------------
Total investments..................................................... 67,861.2 68,705.5
Cash and cash equivalents................................................... 1,356.2 597.4
Broker-dealer related receivables........................................... 33,435.1 28,184.3
Deferred policy acquisition costs........................................... 3,419.5 3,237.4
Amounts due from discontinued operations.................................... 362.5 572.8
Other assets................................................................ 6,184.5 4,770.5
Closed Block assets......................................................... 8,608.2 8,566.6
Separate Accounts assets.................................................... 36,321.7 36,538.7
----------------- -----------------
Total Assets................................................................ $ 157,548.9 $ 151,173.2
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 20,847.4 $ 21,578.6
Future policy benefits and other policyholders liabilities.................. 4,688.6 4,553.8
Securities sold under repurchase agreements................................. 35,693.5 36,006.7
Broker-dealer related payables.............................................. 30,261.4 25,941.5
Short-term and long-term debt............................................... 7,608.6 5,936.3
Other liabilities........................................................... 7,377.9 6,502.8
Closed Block liabilities.................................................... 9,054.2 9,073.7
Separate Accounts liabilities............................................... 36,228.8 36,306.3
----------------- -----------------
Total liabilities..................................................... 151,760.4 145,899.7
----------------- -----------------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Series D convertible preferred stock........................................ 427.8 514.4
Stock employee compensation trust........................................... (427.8) (514.4)
Common stock, at par value.................................................. 2.2 2.2
Capital in excess of par value.............................................. 3,658.7 3,627.5
Treasury stock.............................................................. (145.0) -
Retained earnings........................................................... 1,759.2 1,137.4
Accumulated other comprehensive income...................................... 513.4 506.4
----------------- -----------------
Total shareholders' equity............................................ 5,788.5 5,273.5
----------------- -----------------
Total Liabilities and Shareholders' Equity.................................. $ 157,548.9 $ 151,173.2
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ---------------
(In Millions, Except Per Share Amounts)
<S> <C> <C> <C> <C>
REVENUES
Universal life and investment-type
product policy fee income.......................... $ 270.3 $ 240.6 $ 787.4 $ 707.2
Premiums............................................. 147.1 137.2 436.2 430.0
Net investment income................................ 1,110.7 993.6 3,468.7 2,828.4
Investment (losses) gains, net....................... (195.4) 213.8 153.6 825.9
Commissions, fees and other income................... 1,016.9 905.8 3,357.6 2,451.5
Contribution from the Closed Block................... 24.0 30.1 66.4 95.6
--------------- ---------------- --------------- ---------------
Total revenues................................. 2,373.6 2,521.1 8,269.9 7,338.6
--------------- ---------------- --------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account
balances........................................... 289.6 313.9 872.9 958.5
Policyholders' benefits.............................. 244.1 235.9 764.5 718.3
Other operating costs and expenses................... 1,573.5 1,604.7 5,376.1 4,595.0
--------------- ---------------- --------------- ---------------
Total benefits and other deductions............ 2,107.2 2,154.5 7,013.5 6,271.8
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
Federal income taxes and minority interest......... 266.4 366.6 1,256.4 1,066.8
Federal income taxes................................. 86.0 116.5 414.8 376.2
Minority interest in net income of
consolidated subsidiaries.......................... 41.3 63.5 188.9 112.6
--------------- ---------------- --------------- ---------------
Earnings from continuing operations.................. 139.1 186.6 652.7 578.0
Discontinued operations, net of Federal income
taxes.............................................. .7 (.2) 2.5 (2.9)
--------------- ---------------- --------------- ---------------
Net Earnings......................................... $ 139.8 $ 186.4 $ 655.2 $ 575.1
=============== ================ =============== ===============
Per Common Share:
Basic:
Earnings from continuing operations.............. $ .63 $ .87 $ 2.94 $ 2.89
Discontinued operations, net of Federal
income taxes................................... - - .01 (.02)
--------------- ---------------- --------------- ---------------
Net Earnings..................................... $ .63 $ .87 $ 2.95 $ 2.87
=============== ================ =============== ===============
Diluted:
Earnings from continuing operations.............. $ .61 $ .81 $ 2.84 $ 2.58
Discontinued operations, net of Federal
income taxes................................... .01 - .01 (.01)
--------------- ---------------- --------------- ---------------
Net Earnings..................................... $ .62 $ .81 $ 2.85 $ 2.57
=============== ================ =============== ===============
Cash Dividends Per Common Share $ .05 $ .05 $ .15 $ .15
=============== ================ =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
SHAREHOLDERS' EQUITY
Series C convertible preferred stock, beginning of year..................... $ - $ 24.4
Exchange of Series C convertible preferred stock............................ - (24.4)
----------------- -----------------
Series C convertible preferred stock, end of period......................... - -
----------------- -----------------
Series D convertible preferred stock, beginning of year..................... 514.4 294.0
Exchange of Series D convertible preferred stock............................ - (54.8)
Change in market value of shares............................................ (86.6) 189.9
----------------- -----------------
Series D convertible preferred stock, end of period......................... 427.8 429.1
----------------- -----------------
Stock employee compensation trust, beginning of year........................ (514.4) (294.0)
Exchange of Series D convertible stock in the employee
compensation trust........................................................ - 54.8
Change in market value of shares............................................ 86.6 (189.9)
----------------- -----------------
Stock employee compensation trust, end of period............................ (427.8) (429.1)
----------------- -----------------
Series E convertible preferred stock, beginning of year..................... - 380.2
Exchange of Series E convertible preferred stock............................ - (380.2)
----------------- -----------------
Series E convertible preferred stock, end of period......................... - -
----------------- -----------------
Common stock, at par value, beginning of year............................... 2.2 1.9
Issuance of common stock.................................................... - .3
----------------- -----------------
Common stock, at par value, end of period................................... 2.2 2.2
----------------- -----------------
Capital in excess of par value, beginning of year........................... 3,627.5 2,782.2
Additional capital in excess of par value................................... 31.2 841.0
----------------- -----------------
Capital in excess of par value, end of period............................... 3,658.7 3,623.2
----------------- -----------------
Treasury stock, beginning of year........................................... - -
Purchase of shares for treasury............................................. (145.0) -
----------------- -----------------
Treasury stock, end of period............................................... (145.0) -
----------------- -----------------
Retained earnings, beginning of year........................................ 1,137.4 632.9
Net earnings................................................................ 655.2 575.1
Dividends on preferred stocks............................................... - (15.6)
Dividends on common stock................................................... (33.4) (29.8)
----------------- -----------------
Retained earnings, end of period............................................ 1,759.2 1,162.6
----------------- -----------------
Accumulated other comprehensive income, beginning of year................... 506.4 166.4
Other comprehensive income.................................................. 7.0 230.0
----------------- -----------------
Accumulated other comprehensive income, end of period....................... 513.4 396.4
----------------- -----------------
Total Shareholders' Equity, End of Period................................... $ 5,788.5 $ 5,184.4
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
Net earnings................................................................ $ 655.2 $ 575.1
Adjustments to reconcile net earnings to net cash used
by operating activities:
Interest credited to policyholders' account balances.................... 872.9 958.5
Universal life and investment-type policy fee income.................... (787.4) (707.2)
Net change in trading activities and broker-dealer related
receivables/payables.................................................. (2,365.7) (3,777.8)
(Increase) decrease in matched resale agreements........................ (2,317.8) (4,522.5)
Increase (decrease) in matched repurchase agreements.................... 2,317.8 4,522.5
Investment gains, net of dealer and trading gains....................... (253.2) (425.1)
Change in clearing association fees and regulatory deposits............. 41.9 116.9
Change in Federal income tax payable.................................... 61.3 14.3
Other, net.............................................................. (281.7) 200.3
----------------- -----------------
Net cash used by operating activities....................................... (2,056.7) (3,045.0)
----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................................. 1,869.1 2,158.6
Sales.................................................................... 13,849.8 8,093.5
Purchases................................................................. (16,106.7) (10,770.1)
Decrease in loans to discontinued operations.............................. 300.0 336.2
Sale of subsidiaries...................................................... - 261.0
Other, net................................................................ (323.2) (272.3)
----------------- -----------------
Net cash used by investing activities....................................... (411.0) (193.1)
----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 1,066.8 1,026.9
Withdrawals............................................................. (1,314.2) (1,417.6)
Increase in short-term financings......................................... 1,977.6 3,652.6
Additions to long-term debt............................................... 1,970.8 847.7
Repayments of long-term debt.............................................. (495.5) (159.8)
Payment of obligation to fund accumulated deficit of discontinued
operations.............................................................. (87.2) (83.9)
Purchase of treasury stock................................................ (145.0) -
Other, net................................................................ 253.2 65.8
----------------- -----------------
Net cash provided by financing activities................................... 3,226.5 3,931.7
----------------- -----------------
Change in cash and cash equivalents......................................... 758.8 693.6
Cash and cash equivalents, beginning of year................................ 597.4 755.3
----------------- -----------------
Cash and Cash Equivalents, End of Period.................................... $ 1,356.2 $ 1,448.9
================= =================
Supplemental cash flow information
Interest Paid............................................................. $ 3,520.9 $ 2,928.4
================= =================
Income Taxes Paid......................................................... $ 312.2 $ 338.2
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
conformity with GAAP which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. These statements should be read in
conjunction with the consolidated financial statements of The Equitable
for the year ended December 31, 1997. The results of operations for the
nine months ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
The terms "third quarter 1998" and "third quarter 1997" refer to the three
months ended September 30, 1998 and 1997, respectively. The terms "first
nine months of 1998" and "first nine months of 1997" refer to the nine
months ended September 30, 1998 and 1997, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the current presentation.
2) NEW ACCOUNTING CHANGES AND PRONOUNCEMENTS
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise," which amends
existing accounting and reporting standards for certain activities of
mortgage banking enterprises and other enterprises that conduct operations
that are substantially similar to the primary operations of a mortgage
banking enterprise. This statement is effective for the first fiscal
quarter beginning after December 15, 1998. This statement is not expected
to have a material impact on The Equitable's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging activities. It
requires all derivatives to be recognized on the balance sheet at fair
value. The accounting for changes in the fair value of a derivative
depends on its intended use. Derivatives not used in hedging activities
must be adjusted to fair value through earnings. Changes in the fair value
of derivatives used in hedging activities will, depending on the nature of
the hedge, either be offset in earnings against the change in fair value
of the hedged item attributable to the risk being hedged or recognized in
other comprehensive income until the hedged item affects earnings. For all
hedging activities, the ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings.
SFAS No. 133 requires adoption in fiscal years beginning after June 15,
1999 and permits early adoption as of the beginning of any fiscal quarter
following issuance of the statement. Retroactive application to financial
statements of prior periods is prohibited. The Equitable expects to adopt
the SFAS No. 133 effective January 1, 2000. Adjustments resulting from
initial adoption of the new requirements will be reported in a manner
similar to the cumulative effect of a change in accounting principle and
will be reflected in net income or accumulated other comprehensive income
based upon existing hedging relationships, if any. Management currently is
assessing the impact of adoption. However, Alliance's adoption is not
expected to have a significant impact on The Equitable's consolidated
balance sheet or statement of earnings. Also, since most of DLJ's
derivatives are carried at fair values, The Equitable's consolidated
earnings and financial position are not expected to be significantly
affected by DLJ's adoption of the new requirements.
7
<PAGE>
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
requires capitalization of external and certain internal costs incurred to
obtain or develop internal-use computer software during the application
development stage. The SOP is to be applied prospectively for fiscal years
beginning after December 15, 1998; earlier application is encouraged. The
Equitable adopted the provisions of SOP 98-1 effective January 1, 1998.
The adoption of SOP 98-1 did not have a material impact on The Equitable's
consolidated financial statements. Capitalized internal-use software is
amortized on a straight-line basis over the estimated useful life of the
software. Prior to adopting SOP 98-1, software development costs were
expensed as incurred.
3) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1998 1997
--------------- ---------------
(In Millions)
<S> <C> <C>
Balances, beginning of year............................................... $ 384.5 $ 137.1
Additions charged to income............................................... 72.6 99.2
Deductions for writedowns and asset dispositions.......................... (173.8) (61.7)
---------------- ---------------
Balances, End of Period................................................... $ 283.3 $ 174.6
=============== ===============
Balances, end of period:
Mortgage loans on real estate........................................... $ 28.5 $ 51.6
Equity real estate...................................................... 254.8 123.0
---------------- ---------------
Total..................................................................... $ 283.3 $ 174.6
=============== ===============
</TABLE>
For the third quarter and first nine months of 1998 and of 1997,
investment income is shown net of investment expenses (including interest
expense to finance short-term trading instruments) of $858.2 million,
$2,551.9 million, $826.1 million and $2,355.3 million, respectively.
As of September 30, 1998 and December 31, 1997, fixed maturities
classified as available for sale had amortized costs of $20,269.6 million
and $19,107.1 million, fixed maturities in the held to maturity portfolio
had estimated fair values of $285.7 million and $164.3 million and trading
account securities had amortized costs of $17,004.9 million and $16,521.9
million, respectively. Other equity investments included equity securities
with carrying values of $572.7 million and $767.1 million and costs of
$527.4 million and $741.4 million at these same respective dates.
For the first nine months of 1998 and of 1997, proceeds received on sales
of fixed maturities classified as available for sale amounted to $13,271.1
million and $7,600.7 million, respectively. Gross gains of $116.1 million
and $126.4 million and gross losses of $72.7 million and $95.2 million
were realized on these sales for the first nine months of 1998 and of
1997, respectively. Unrealized investment gains related to fixed
maturities classified as available for sale increased by $7.8 million in
the first nine months of 1998, resulting in a balance of $879.2 million at
September 30, 1998.
8
<PAGE>
Impaired mortgage loans along with the related provision for losses were
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses....................... $ 126.2 $ 196.7
Impaired mortgage loans without provision for losses.................... 16.4 3.6
---------------- -----------------
Recorded investment in impaired mortgage loans.......................... 142.6 200.3
Provision for losses.................................................... (24.6) (51.8)
---------------- -----------------
Net Impaired Mortgage Loans............................................. $ 118.0 $ 148.5
================ =================
</TABLE>
During the first nine months of 1998 and of 1997, respectively, The
Equitable's average recorded investment in impaired mortgage loans was
$177.1 million and $307.3 million. Interest income recognized on these
impaired mortgage loans totaled $9.5 million and $13.3 million ($.9
million and $1.5 million recognized on a cash basis) for the first nine
months of 1998 and 1997, respectively.
4) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are treated as financing
transactions and carried at the amounts at which the securities
subsequently will be reacquired per the respective agreements. These
agreements with counterparties were collateralized principally by U.S.
government securities. The weighted average interest rates on securities
sold under repurchase agreements were 5.24% and 6.04% at September 30,
1998 and December 31, 1997, respectively.
5) CLOSED BLOCK
Summarized financial information for the Closed Block is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Fixed maturities:
Available for sale, at estimated fair value (amortized cost of
$4,154.7 and $4,059.4)............................................. $ 4,458.2 $ 4,231.0
Mortgage loans on real estate.......................................... 1,577.4 1,341.6
Policy loans........................................................... 1,652.4 1,700.2
Cash and other invested assets......................................... 73.4 282.0
Deferred policy acquisition costs...................................... 630.5 775.2
Other assets........................................................... 216.3 236.6
----------------- -----------------
Total Assets........................................................... $ 8,608.2 $ 8,566.6
================= =================
Liabilities
Future policy benefits and other policyholders' account balances....... $ 8,982.8 $ 8,993.2
Other liabilities...................................................... 71.4 80.5
----------------- -----------------
Total Liabilities...................................................... $ 9,054.2 $ 9,073.7
================= =================
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Premiums and other income................ $ 155.1 $ 161.4 $ 488.1 $ 510.8
Investment income (net of investment
expenses of $4.7, $6.9, $15.5 and
$21.3)................................. 143.3 145.8 425.0 424.1
Investment gains (losses), net........... .3 (.4) (1.6) 5.0
--------------- --------------- --------------- ---------------
Total revenues........................... 298.7 306.8 911.5 939.9
--------------- --------------- --------------- ---------------
Benefits and Other Deductions
Policyholders' benefits and dividends.... 252.8 258.7 797.6 795.5
Other operating costs and expenses....... 21.9 18.0 47.5 48.8
---------------
--------------- --------------- ---------------
Total benefits and other deductions...... 274.7 276.7 845.1 844.3
--------------- --------------- --------------- ---------------
Contribution from the Closed Block....... $ 24.0 $ 30.1 $ 66.4 $ 95.6
=============== =============== =============== ===============
</TABLE>
Investment valuation allowances amounted to $9.0 million and $18.5 million
on mortgage loans and $23.4 million and $16.8 million on equity real
estate at September 30, 1998 and December 31, 1997, respectively.
Impaired mortgage loans along with the related provision for losses were
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 55.7 $ 109.1
Impaired mortgage loans without provision for losses................... 7.9 .6
----------------- -----------------
Recorded investment in impaired mortgages.............................. 63.6 109.7
Provision for losses................................................... (8.0) (17.4)
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 55.6 $ 92.3
================= =================
</TABLE>
During the first nine months of 1998 and of 1997, respectively, the Closed
Block's average recorded investment in impaired mortgage loans was $97.5
million and $115.0 million. Interest income recognized on these impaired
mortgage loans totaled $4.0 million and $6.7 million ($1.5 million and
$2.8 million recognized on a cash basis) for the first nine months of 1998
and 1997, respectively.
10
<PAGE>
6) DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Mortgage loans on real estate.......................................... $ 487.6 $ 635.2
Equity real estate..................................................... 730.4 874.5
Other equity investments............................................... 130.2 209.3
Other invested assets.................................................. 271.6 152.4
----------------- -----------------
Total investments.................................................... 1,619.8 1,871.4
Cash and cash equivalents.............................................. 38.7 106.8
Other assets........................................................... 224.1 243.8
----------------- -----------------
Total Assets........................................................... $ 1,882.6 $ 2,222.0
================= =================
Liabilities
Policyholders liabilities.............................................. $ 1,029.3 $ 1,048.3
Allowance for future losses............................................ 298.1 259.2
Amounts due to continuing operations................................... 362.5 572.8
Other liabilities...................................................... 192.7 341.7
----------------- -----------------
Total Liabilities...................................................... $ 1,882.6 $ 2,222.0
================= =================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Investment income (net of investment
expenses of $15.8, $23.7, $53.3
and $73.3)............................. $ 46.3 $ 49.9 $ 124.8 $ 128.3
Investment gains (losses), net........... 1.5 (.4) 34.7 (4.5)
Policy fees, premiums and other
income, net............................ - - (.1) .1
--------------- --------------- --------------- ---------------
Total revenues........................... 47.8 49.5 159.4 123.9
Benefits and Other Deductions............ 35.3 40.8 109.9 131.4
Earnings credited (losses charged)
to allowance for future losses......... 12.5 8.7 49.5 (7.5)
--------------- --------------- --------------- ---------------
Pre-tax loss from operations............. - - - -
Pre-tax earnings from releasing (loss
from strengthening) the allowance
for future losses...................... 1.2 (.4) 3.9 (4.5)
Federal income tax (expense) benefit..... (.5) .2 (1.4) 1.6
--------------- --------------- --------------- ---------------
Earnings (Loss) from Discontinued
Operations............................. $ .7 $ (.2) $ 2.5 $ (2.9)
=============== =============== =============== ===============
</TABLE>
The Equitable's quarterly process for evaluating the allowance for future
losses applies the current period's results of discontinued operations
against the allowance, re-estimates future losses, and adjusts the
allowance, if appropriate. The evaluations performed as of September 30,
1998 and 1997 resulted in management's decision to release the allowance
by $3.9 million and strengthen the allowance by $4.5 million for the nine
months ended September 30, 1998 and 1997, respectively. This resulted in
after-tax earnings of $2.5 million for the first nine months of 1998 and
an after-tax charge of $2.9 million for the first nine months of 1997.
11
<PAGE>
Management believes the allowance for future losses at September 30, 1998
is adequate to provide for all future losses; however, the determination
of the allowance involves numerous estimates and subjective judgments
regarding the expected performance of Discontinued Operations Investment
Assets. There can be no assurance the losses provided for will not differ
from the losses ultimately realized. To the extent actual results or
future projections of discontinued operations differ from management's
current estimates and assumptions underlying the allowance for future
losses, the difference would be reflected in the consolidated statements
of earnings in discontinued operations. In particular, to the extent
income, sales proceeds and holding periods for equity real estate differ
from management's previous assumptions, periodic adjustments to the
allowance are likely to result.
Investment valuation allowances amounted to $2.1 million and $28.4 million
on mortgage loans and $49.6 million and $88.4 million on equity real
estate at September 30, 1998 and December 31, 1997, respectively.
Impaired mortgage loans along with the related provision for losses were
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 6.4 $ 101.8
Impaired mortgage loans without provision for losses................... 9.0 .2
----------------- -----------------
Recorded investment in impaired mortgages.............................. 15.4 102.0
Provision for losses................................................... (5.2) (27.3)
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 10.2 $ 74.7
================= =================
</TABLE>
During the first nine months of 1998 and of 1997, discontinued operations'
average recorded investment in impaired mortgage loans was $95.0 million
and $88.4 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $4.6 million and $4.6 million ($3.4
million and $3.5 million recognized on a cash basis) in the first nine
months of 1998 and 1997, respectively.
Benefits and other deductions included $5.8 million, $21.7 million, $12.7
million and $42.4 million of interest expense related to amounts borrowed
from continuing operations for the third quarter and first nine months of
1998 and of 1997, respectively.
7) FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary,
at the end of each successive interim period to reflect the current
estimate of the annual effective tax rate.
8) ALLIANCE
On June 30, 1997, Alliance reduced the recorded value of goodwill and
contracts associated with its acquisition of Cursitor by $120.9 million.
This charge reflected Alliance's view that Cursitor's continuing decline
in assets under management and its reduced profitability, resulting from
relative investment underperformance, no longer supported the carrying
value of its investment. As a result, The Equitable's earnings from
continuing operations for the first nine months of 1997 included a charge
of $59.5 million, net of a Federal income tax benefit of $10.0 million and
minority interest of $51.4 million.
In addition to its 1% general partnership interest in Alliance, at
September 30, 1998, The Equitable owned approximately 56.8% of Alliance
Units.
12
<PAGE>
9) CAPITAL STOCK
In May 1998, the Holding Company's Board of Directors authorized a stock
repurchase program pursuant to which the Holding Company may repurchase up
to 8 million shares of its Common Stock from time to time in the open
market or through privately negotiated transactions. In September, the
Holding Company's Board of Directors increased the number of shares
authorized under the stock repurchase program to 15 million. At September
30, 1998, the Holding Company has repurchased 2.6 million shares of Common
Stock at a cost of $145.0 million.
In December 1993, the Holding Company established a SECT to provide a
source of funding for a portion of obligations arising from various
employee compensation and benefits programs of subsidiaries. At that time,
the Holding Company sold 60,000 shares of Series D Preferred Stock to the
SECT. Periodically, the SECT is required to distribute an amount of Series
D Preferred Stock (or Common Stock issued on conversion thereof) based on
a predetermined formula. In April 1996, the Holding Company had registered
with the SEC approximately 11.9 million shares of Common Stock issuable
upon conversion of shares of Series D Preferred Stock held by the SECT. In
July 1997, the SECT released 8,040 shares of Series D Preferred Stock
which were converted into 1.6 million shares of Common Stock. AXA
purchased 960,000 shares directly while the remaining shares were sold
through an agent to the public. The net proceeds of the sale totaled $54.8
million, increasing shareholders' equity by this amount.
On August 4, 1997, the Holding Company redeemed in full $364.2 million
principal amount of its 6.125% Subordinated Debentures due 2024, 50,017
shares of its Series C and 822,460 shares of its Series E Preferred
Stocks. Upon redemption of all Subordinated Debentures and shares of
Series C and E Preferred Stocks, approximately 32.5 million additional
shares of Common Stock were issued by the Holding Company. Holders of the
Series C and E Preferred Stocks received cash representing dividends
accrued from the prior dividend payment date through the date of sale. As
a result of those transactions, shareholders' equity increased by $339.7
million.
10) RESTRUCTURING COSTS
During the first nine months of 1997, The Equitable recorded pre-tax
provisions of $42.4 million, primarily for employee termination and exit
costs. The amounts paid during the first nine months of 1998 totaled $16.8
million. At September 30, 1998, the $45.2 million of liabilities included
costs related to employee termination and exit costs, the termination of
operating leases and the consolidation of insurance operations' service
centers.
13
<PAGE>
11) COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Net earnings............................. $ 139.8 $ 186.4 $ 655.2 $ 575.1
Less - dividends on preferred stocks..... - (2.2) - (15.6)
--------------- --------------- --------------- ---------------
Net earnings applicable to common
shares - Basic......................... 139.8 184.2 655.2 559.5
Add - dividends on convertible
preferred stock and interest on
convertible subordinated debt,
when dilutive.......................... - 3.5 - 24.5
Less - effect of assumed exercise of
options of publicly held subsidiaries.. (1.5) (6.5) (13.4) (14.1)
--------------- --------------- --------------- ---------------
Net Earnings Applicable to Common
Shares - Diluted....................... $ 138.3 $ 181.2 $ 641.8 $ 569.9
=============== =============== =============== ===============
Weighted average common shares
outstanding - Basic.................... 221.9 211.1 222.3 194.8
Add - assumed exercise of stock
options................................ 3.2 2.1 3.0 1.6
Add - assumed conversion of
convertible preferred stock............ - 5.9 - 13.9
Add - assumed conversion of
convertible subordinated debt.......... - 4.9 - 11.4
--------------- --------------- --------------- ---------------
Weighted Average Shares
Outstanding - Diluted.................. 225.1 224.0 225.3 221.7
=============== =============== =============== ===============
</TABLE>
12) LITIGATION
There have been no new material legal proceedings and no material
developments in matters which were previously reported in The Equitable's
Notes to Consolidated Financial Statements for the year ended December 31,
1997, except as follows:
On April 7, 1998, the Federal district court in Tampa, Florida entered an
order preliminarily approving the settlement agreement relating to the
Golomb, Malvin, Bowler, Bachman and Fletcher cases and conditionally
certifying the settlement class. The order also deems filed an amended
complaint that asserts on a nationwide basis claims of the kind previously
made in the five pending cases. In October 1998, the court entered a
judgment approving the settlement agreement and, in November, a member of
the national class filed a notice of appeal of the judgment. This appeal
delays the dismissal of the cases and Equitable Life's payment of cash
benefits, apart from a modest payment in respect of administration fees,
under the terms of the settlement agreement. Equitable Life intends to
oppose the appeal.
In Cole, the court on February 17, 1998, granted Equitable Life and EOC's
motion for summary judgment dismissing the remaining claims of breach of
contract and negligent misrepresentation. The court therefore denied
plaintiffs' motion to certify the class. In April 1998, plaintiffs noticed
their appeal from that decision and from the June 1996 decision, the
appeal from which had been dismissed. This appeal has yet to be briefed
and argued.
14
<PAGE>
In Duncan, plaintiffs moved for class certification in August 1998.
Equitable Life opposed that motion and moved for summary judgment
dismissing the amended petition in its entirety. Discovery regarding class
certification issues is ongoing.
In Bradley, in August 1998, EVLICO and EOC moved for summary judgment on
all causes of action, and briefing continues on this motion. Briefing
regarding plaintiff's motion for class certification is completed,
although discovery regarding class certification issues is the subject of
ongoing motion practice.
In Dillon, the court granted plaintiff's motion to withdraw his motion for
class certification on May 20, 1998. The parties have reached an agreement
in principle to settle plaintiff's individual claims.
In Franze, the parties are now engaged in class certification discovery.
In Chaviano, on June 12, 1998, the court granted defendants' motion for
summary judgment dismissing plaintiff's claim for violation of
Massachusetts securities laws, and denied defendants' motion to dismiss or
for summary judgment as to the balance of the amended complaint. On June
26, 1998, the court granted plaintiff's motion for leave to further amend
the complaint, and denied plaintiff's motion for class certification. The
parties have reached an agreement in principle to settle plaintiff's
individual claims.
In Luther, the parties have settled the Luthers' individual claims.
In Brown, the court referred the case to mediation, which is pending.
The U.S. Department of Labor has determined to take no further action
regarding its investigation of Equitable Life's management of the Prime
Property Fund.
In the proceeding related to Alliance North American Government Income
Trust, Inc., the U. S. Court of Appeals for the Second Circuit in October
1998 affirmed the Second Decision in part and reversed the Second Decision
in part. The Court of Appeals affirmed the Second Decision insofar as it
denied plaintiffs' motion to file an amended complaint alleging that the
Fund did not properly disclose that it planned to invest in
mortgage-backed derivative securities and that certain advertisements used
by the Fund misrepresented the risks of investing in the Fund. The Court
of Appeals reversed the Second Decision insofar as it denied plaintiffs'
motion to file an amended complaint alleging that the Fund misrepresented
its ability to hedge against currency risk.
In National Gypsum, DLJSC appealed the Bankruptcy Court's January ruling
to the U.S. District Court for the Northern District of Texas. On May 7,
1998, DLJSC and others were named as defendants in a second action filed
in a Texas State Court brought by the NGC Settlement Trust. The
allegations of this second Texas State Court action are substantially
similar to those of the earlier class action pending in the State Court.
In Harrah's Jazz, the proponents of the plan of reorganization filed a
notice in the U.S. Bankruptcy Court for the Eastern District of Louisiana
on October 30, 1998 indicating that the conditions to the plan of
reorganization have been satisfied and that the plan of reorganization
became effective as of October 30, 1998. Accordingly, the settlement of
the litigation against DLJSC has become final and did not have a material
effect on DLJ's results of operation or financial condition.
In April 1998, DLJSC's motions for summary judgment were denied in a
litigation commenced in March 1991 by Dayton Monetary Associates and
Charles Davison, who, along with more than 200 other plaintiffs, filed
several complaints against DLJSC and a number of other financial
institutions and several individuals in the U.S. District Court for the
Southern District of New York. The plaintiffs allege that DLJSC and other
defendants violated civil provisions of RICO by inducing plaintiffs to
invest over $40.0 million during the years 1978 through 1982 in The
Securities Groups, a number of tax shelter limited partnerships. The
plaintiffs seek recovery of the loss of their entire investment and an
15
<PAGE>
approximately equivalent amount of tax-related damages. Judgment for
damages under RICO are subject to trebling. Discovery is complete. No
trial date has been set by the court. DLJSC believes that it has
meritorious defenses to the complaints and will continue to contest the
suits vigorously. Although there can be no assurance, DLJ does not believe
that the ultimate outcome of this litigation will have a material adverse
effect on its consolidated financial condition and/or its results of
operations in any particular period.
In addition to the matters previously reported and the matters described
above, the Holding Company and its subsidiaries are involved in various
legal actions and proceedings in connection with their businesses. Some of
the actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot be
predicted with certainty, in the opinion of management no such matter is
likely to have a material adverse effect on The Equitable's consolidated
financial position or results of operations.
13) BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Insurance Operations..................... $ 970.2 $ 990.0 $ 3,103.6 $ 2,971.9
Investment Services...................... 1,395.2 1,527.0 5,145.0 4,357.8
Corporate and Other...................... 15.3 11.3 42.1 34.5
Consolidation/elimination................ (7.1) (7.2) (20.8) (25.6)
--------------- --------------- --------------- ---------------
Total.................................... $ 2,373.6 $ 2,521.1 $ 8,269.9 $ 7,338.6
=============== =============== =============== ===============
Earnings from Continuing
Operations before Federal Income
Taxes and Minority Interest
Insurance Operations..................... $ 171.0 $ 152.6 $ 606.1 $ 402.1
Investment Services...................... 120.5 240.5 721.6 755.5
Corporate and Other...................... 10.0 4.1 22.9 9.7
Consolidation/elimination................ (.4) (.4) (1.1) (1.3)
--------------- --------------- --------------- ---------------
Subtotal............................... 301.1 396.8 1,349.5 1,166.0
Corporate interest expense............... (34.7) (30.2) (93.1) (99.2)
--------------- --------------- --------------- ---------------
Total.................................... $ 266.4 $ 366.6 $ 1,256.4 $ 1,066.8
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Insurance Operations................................................... $ 70,791.4 $ 68,041.5
Investment Services.................................................... 86,317.6 83,120.3
Corporate and Other.................................................... 863.9 543.4
Consolidation/elimination.............................................. (424.0) (532.0)
----------------- -----------------
Total.................................................................. $ 157,548.9 $ 151,173.2
================= =================
</TABLE>
16
<PAGE>
14) SALE OF SUBSIDIARIES
On June 10, 1997, Equitable Life sold ERE to Lend Lease. The total
purchase price was $400.0 million and consisted of $300.0 million in cash
and a $100.0 million note maturing in eight years and bearing interest at
the rate of 7.4%. The Equitable recognized an investment gain of $162.4
million, net of Federal income tax of $87.4 million as a result of this
transaction. Through June 10, 1997, the businesses sold reported combined
revenues of $91.6 million and combined net earnings of $10.7 million.
15) COMPREHENSIVE INCOME
The components of comprehensive income for the third quarter 1998 and 1997
and the first nine months of 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Net earnings............................. $ 139.8 $ 186.4 $ 655.2 $ 575.1
--------------- --------------- --------------- ---------------
Change in unrealized gains (losses),
net of reclassification adjustment..... (33.0) 136.5 7.0 230.0
Minimum pension liability adjustment..... - - - -
--------------- --------------- --------------- ---------------
Other comprehensive income............... (33.0) 136.5 7.0 230.0
--------------- --------------- --------------- ---------------
Comprehensive Income..................... $ 106.8 $ 322.9 $ 662.2 $ 805.1
=============== =============== =============== ===============
</TABLE>
17
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and financial
condition of The Equitable should be read in conjunction with the Consolidated
Financial Statements and the related Notes to Consolidated Financial Statements
included elsewhere herein, and with the Management's Discussion and Analysis
section ("MD&A") included in The Equitable's 1997 Report on Form 10-K.
RESULTS OF OPERATIONS
The following table presents the results of operations outside of the Closed
Block combined on a line-by-line basis with the contribution of the Closed
Block. The Insurance Operations analysis, which begins on page 19, likewise
reflects the Closed Block amounts on a line-by-line basis. The MD&A addresses
the combined results of operations unless noted otherwise. The Investment
Services discussion begins on page 22.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Policy fee income and premiums................ $ 572.0 $ 539.0 $ 1,711.2 $ 1,647.5
Net investment income......................... 1,254.0 1,139.4 3,893.7 3,252.5
Investment (losses) gains, net................ (195.1) 213.4 152.0 830.9
Commissions, fees and other income............ 1,017.4 906.0 3,358.1 2,452.0
--------------- ---------------- --------------- ---------------
Total revenues.............................. 2,648.3 2,797.8 9,115.0 8,182.9
Total benefits and other deductions........... 2,381.9 2,431.2 7,858.6 7,116.1
--------------- ---------------- --------------- ---------------
Earnings from continuing operations
before Federal income taxes and
minority interest........................... 266.4 366.6 1,256.4 1,066.8
Federal income taxes.......................... 86.0 116.5 414.8 376.2
Minority interest in net income of
consolidated subsidiaries................... 41.3 63.5 188.9 112.6
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations........... $ 139.1 $ 186.6 $ 652.7 $ 578.0
=============== ================ =============== ===============
</TABLE>
Continuing Operations
During third quarter 1998, earnings from continuing operations declined $47.5
million from third quarter 1997 principally due to the impact of adverse capital
market conditions on Investment Services, particularly at DLJ. Revenues from
Investment Services were approximately $1.40 billion, down $131.9 million from
the prior year's third quarter. Underwriting revenues at DLJ were sharply down
and trading losses were incurred on emerging market and high yield positions.
Excluding the effect in the 1997 period of the $249.8 million net gain
recognized on the sale of ERE and The Equitable's share of Alliance's writedown
of the carrying value of intangible assets associated with the Cursitor
acquisition, the higher pre-tax results of continuing operations for the first
nine months of 1998 reflected increased earnings by Investment Services and
Insurance Operations and lower losses for Corporate and Other. Federal income
taxes increased due to the higher pre-tax results of operations and the 3.5%
Federal tax on partnership gross income from the active conduct of a trade or
business which was imposed on certain publicly traded limited partnerships,
including Alliance, effective January 1, 1998. Minority interest in net income
of consolidated subsidiaries was higher principally due to increased earnings at
both DLJ and Alliance during the first half of the year.
18
<PAGE>
The $932.1 million increase in revenues for the first nine months of 1998
compared to the corresponding period in 1997 was attributed primarily to a
$906.1 million increase in commissions, fees and other income principally due to
increased business activity within Investment Services principally during the
first half of the year. Net investment income increased $641.2 million for the
first nine months of 1998 with increases of $654.3 million for Investment
Services partially offset by a $6.8 million decrease for Insurance Operations.
Investment gains decreased by $678.9 million for the first nine months of 1998
from $830.9 million for the same period in 1997 reflecting $473.3 million lower
gains in Investment Services and the effect of the $252.1 million gross gain
recognized on the sale of ERE during second quarter 1997, partially offset by
$45.2 million higher gains for Insurance Operations. The $43.0 million increase
in investment gains on General Account Investment Assets and $50.7 million gross
gains resulting from the exercise of Alliance and DLJ options and the conversion
of DLJ restricted stock units was more than offset by a $448.7 million decline
at DLJ.
For the first nine months of 1998, total benefits and other deductions increased
by $742.5 million from the comparable period in 1997, reflecting increases in
other operating costs and expenses of $779.8 million and a $48.4 million
increase in policyholders' benefits partially offset by a $85.7 million decrease
in interest credited to policyholders. The increase in other operating costs and
expenses principally resulted from increased operating costs of $821.1 million
in Investment Services.
COMBINED RESULTS OF CONTINUING OPERATIONS BY SEGMENT
Insurance Operations
The following table combines the Closed Block amounts with the reported results
of operations outside of the Closed Block on a line-by-line basis.
<TABLE>
<CAPTION>
Insurance Operations
(In Millions)
Nine Months Ended September 30,
------------------------------------------------------------------
1998
------------------------------------------------
As Closed 1997
Reported Block Combined Combined
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Policy fees, premiums and other income.......... $ 1,335.7 $ 488.1 $ 1,823.8 $ 1,729.7
Net investment income........................... 1,634.6 425.0 2,059.6 2,066.4
Investment gains (losses), net.................. 66.9 (1.6) 65.3 20.1
Contribution from the Closed Block.............. 66.4 (66.4) - -
------------- -------------- ------------- --------------
Total revenues................................ 3,103.6 845.1 3,948.7 3,816.2
Total benefits and other deductions............. 2,497.5 845.1 3,342.6 3,414.1
------------- -------------- ------------- --------------
Earnings from Continuing Operations
before Federal Income Taxes and
Minority Interest............................. $ 606.1 $ - $ 606.1 $ 402.1
============= ============== ============= ==============
</TABLE>
Insurance Operations' earnings for the first nine months of 1998 reflected an
increase of $204.0 million from the year earlier period. Lower interest-credited
on policyholders' account balances, higher policy fees on variable and
interest-sensitive life and individual annuity contracts and higher investment
gains were offset by higher mortality on a larger book of business.
19
<PAGE>
Total revenues increased by $132.5 million primarily due to a $38.4 million
increase in investment results, an $80.2 million increase in policy fees and a
$30.4 million increase in commissions, fees and other income, offset by a $16.5
million decline in premiums. For the first nine months of this year, there was
an overall increase in Insurance Operations investment results which primarily
result from $51.8 million higher results on General Account Investment Assets
principally due to higher returns on equity real estate partially offset by
$20.7 million lower interest on reduced borrowings by discontinued operations.
In the third quarter of 1998, investment income declined $73.8 million as
compared to third quarter 1997 and by $55.7 million from the second quarter 1998
principally due to lower income on other equity investments. Policy fee income
for the first nine months of 1998 rose $80.2 million to $787.4 million due to
higher insurance and annuity account balances. The decrease in premiums during
that same period principally was due to lower traditional life and individual
health premiums.
Total benefits and other deductions for the first nine months of 1998 declined
$71.5 million from the comparable 1997 period. An $85.8 million decrease in
interest credited on policyholders' account balances resulted from moderately
lower crediting rates on slightly lower General Account balances. The decline in
policyholder account balances is primarily due to the single large COLI policy
surrendered in the first quarter of 1998. DAC capitalization increased by $75.6
million. There were $41.7 million of restructuring costs during the first nine
months of 1997 and none in the 1998 period. Offsetting these reductions were
$75.1 million higher commission expenses due to increased sales, increases of
$48.4 million in policyholders' benefits primarily resulting from higher death
claims experience on a higher in force book of business and higher DAC
amortization of $10.3 million due to higher margins including higher investment
gains.
Premiums and Deposits - The following table lists premiums and deposits,
including universal life and investment-type contract deposits, for Insurance
Operations' major product lines.
<TABLE>
<CAPTION>
Premiums and Deposits
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Individual annuities
First year.................................. $ 1,189.1 $ 862.0 $ 3,465.2 $ 2,255.8
Renewal..................................... 292.0 283.6 1,026.4 968.2
--------------- ---------------- --------------- ---------------
1,481.1 1,145.6 4,491.6 3,224.0
Individual life(1)
First year recurring........................ 54.8 46.9 162.0 151.9
First year optional......................... 49.4 43.6 161.5 162.4
Renewal..................................... 491.8 479.3 1,545.0 1,519.1
--------------- ---------------- --------------- ---------------
596.0 569.8 1,868.5 1,833.4
Other(2)
First year.................................. 2.0 4.4 7.3 12.7
Renewal..................................... 97.7 85.5 281.4 267.2
--------------- ---------------- --------------- ---------------
99.7 89.9 288.7 279.9
Total first year.............................. 1,295.3 956.9 3,796.0 2,582.8
Total renewal................................. 881.5 848.4 2,852.8 2,754.5
--------------- ---------------- --------------- ---------------
Total individual insurance and
annuity products............................ 2,176.8 1,805.3 6,648.8 5,337.3
Total group pension products.................. 103.9 84.2 279.3 249.3
--------------- ---------------- --------------- ---------------
Total Premiums and Deposits................... $ 2,280.7 $ 1,889.5 $ 6,928.1 $ 5,586.6
=============== ================ =============== ===============
<FN>
(1) Includes variable and interest-sensitive and traditional life products.
(2) Includes health insurance and reinsurance assumed.
</FN>
</TABLE>
20
<PAGE>
First year premiums and deposits for individual insurance and annuity products
for the first nine months of 1998 increased from prior year's level by $1.21
billion primarily due to higher sales of individual annuities. Some slowdown in
sales was experienced in the final weeks of third quarter 1998, which management
believes resulted from adverse capital market conditions. Renewal premiums and
deposits increased by $98.3 million during the first nine months of 1998 over
the prior year period as increases in the larger block of individual annuities
and variable and interest-sensitive life policies were partially offset by
decreases in the traditional life product line. The 53.6% increase in first year
individual annuities premiums and deposits in the first nine months of 1998 over
the prior year period included a $847.8 million increase in sales of a line of
retirement annuity products sold through expanded wholesale distribution
channels, up from $354.9 million sold through that distribution channel in the
first nine months of 1997. Compared with the first nine months of 1997, retail
sales of individual annuities rose 19.0% to $2.26 billion in 1998.
Surrenders and Withdrawals - The following table summarizes Insurance
Operations' surrenders and withdrawals, including universal life and
investment-type contract withdrawals, for major individual insurance and
annuities' product lines.
<TABLE>
<CAPTION>
Individual Insurance and Annuities
Surrenders and Withdrawals by Product Line
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Individual annuities.......................... $ 626.1 $ 650.5 $ 2,067.8 $ 1,814.0
Variable and interest-sensitive life.......... 120.1 129.8 952.5 376.3
Traditional life.............................. 83.5 91.4 272.7 288.8
--------------- ---------------- --------------- ---------------
Total......................................... $ 829.7 $ 871.7 $ 3,293.0 $ 2,479.1
=============== ================ =============== ===============
</TABLE>
Policy and contract surrenders and withdrawals increased $813.9 million during
the first nine months of 1998 compared to the same period in 1997 principally
due to the first quarter 1998 surrender of $561.8 million related to a single
large COLI contract. Since there were outstanding policy loans on the
surrendered contract, there were no cash outflows. Excluding the effect of this
one surrender, the remaining $252.1 million increase resulted from higher
surrenders and withdrawals in the larger book of individual annuities and
variable and interest-sensitive life policies.
21
<PAGE>
Investment Services
The following table summarizes the results of continuing operations for
Investment Services.
<TABLE>
<CAPTION>
Investment Services
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Third party commissions and fees.............. $ 971.8 $ 867.9 $ 3,227.2 $ 2,327.0
Affiliate fees(1)............................. 15.4 13.7 46.2 72.0
Net dealer and trading gains, investment
results and other income.................... 408.0 645.4 1,871.6 1,958.8
--------------- ---------------- --------------- ---------------
Total revenues................................ 1,395.2 1,527.0 5,145.0 4,357.8
Total costs and expenses...................... 1,274.7 1,286.5 4,423.4 3,602.3
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Federal Income Taxes and
Minority Interest........................... $ 120.5 $ 240.5 $ 721.6 $ 755.5
=============== ================ =============== ===============
<FN>
(1) Includes ERE in 1997.
</FN>
</TABLE>
During third quarter 1998, Investment Services earnings from continuing
operations before Federal income taxes and minority interest declined $120.0
million from third quarter 1997 due to the impact of market volatility and the
disruption in capital markets on DLJ. Underwriting revenues at DLJ were sharply
down and trading losses and mark to market valuation losses were incurred on
fixed maturities and emerging market securities.
On June 10, 1997, Equitable Life sold ERE to Lend Lease and entered into
long-term advisory agreements whereby the businesses sold will continue to
provide services to Equitable Life's General Account and Separate Accounts. The
Equitable recognized a gross gain on this sale of $252.1 million (before
deducting $2.3 million of related state income tax). Also during the second
quarter 1997, Alliance wrote down the recorded value of goodwill and contracts
associated with its acquisition of Cursitor by $120.9 million. The impact of
Alliance's charge on The Equitable's 1997 net earnings was approximately $59.5
million.
Excluding the effects of the gain on the ERE sale and the Cursitor writedown,
for the first nine months of 1998, pre-tax earnings for Investment Services
increased by $95.0 million from the year earlier period. Higher operating
earnings for Alliance of $65.2 million and $45.7 million of gains related to the
issuance of Alliance Units upon exercise of options and increases in DLJ capital
from tax benefits from the exercise of options and conversion of restricted
stock units during the 1998 period were partially offset by lower operating
earnings of $2.0 million for DLJ in the 1998 period and by the $14.8 million
earnings contribution from EREIM in the 1997 period. Total segment revenues
increased by $787.2 million principally due to higher revenues at DLJ. Total
costs and expenses increased by $821.1 million for the first nine months of 1998
as compared to the comparable period in 1997 principally reflecting increases in
compensation and interest and other expenses at DLJ due to increased activity in
the first half of 1998.
22
<PAGE>
The following table summarizes results of operations by business unit.
<TABLE>
<CAPTION>
Investment Services
Results of Operations by Business Unit
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Business Unit:
DLJ......................................... $ 40.7 $ 176.1 $ 457.1 $ 459.1
Alliance.................................... 79.3 67.4 244.8 58.7
Equitable Real Estate(1).................... - - - 14.8
Gain on sale of ERE(2)...................... - - - 249.8
Consolidation/elimination(3)................ .5 (3.0) 19.7 (26.9)
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Federal Income Taxes and
Minority Interest(4)........................ $ 120.5 $ 240.5 $ 721.6 $ 755.5
=============== ================ =============== ===============
<FN>
(1) Includes results of operations through June 10, 1997, the sale date of ERE
to Lend Lease.
(2) Gain on the sale of ERE is net of $2.3 million related state income tax.
(3) Includes the gain on the exercise of DLJ and Alliance options, the
conversion of DLJ restricted stock units, and an investment loss in the
aggregate totaling $.6 million, $6.7 million, $43.1 million (net of $7.6
million of state taxes) and $6.7 million for the third quarter and first
nine months of 1998 and 1997, respectively, as well as interest expense of
$3.1 million and $9.2 million related to intercompany debt issued by
intermediate holding companies payable to Equitable Life for the third
quarters and first nine months of both 1998 and 1997, respectively.
(4) Pre-tax minority interest related to DLJ was $15.6 million, $50.7 million,
$140.9 million and $130.6 million for the third quarters and first nine
months of 1998 and of 1997, respectively, and $33.8 million, $28.7 million,
$104.5 million and $24.9 million for Alliance for the same respective
periods.
</FN>
</TABLE>
DLJ - DLJ's pre-tax earnings from continuing operations for the first nine
months of 1998 were $457.1 million, down $2.0 million from the comparable prior
year period. Revenues increased $808.9 million to $4.12 billion as net
investment income increased $654.8 million, with higher underwriting revenues of
$143.4 million in the first half of 1998, higher fee income of $358.6 million
and higher commissions of $120.8 million. These increases were partially offset
by dealer and trading losses of $99.7 million as compared to $332.2 million of
trading gains for the 1997 period. This loss arose from the impact of trading
losses and mark-to-market valuations of its fixed maturities as well as trading
losses incurred in Russian and other emerging markets securities during third
quarter 1998. DLJ's expenses were $3.66 billion for the first nine months of
1998, up $810.9 million from the comparable prior year period primarily due to
higher interest expense of $382.3 million, $292.0 million increase in
compensation and commissions, $56.7 million higher occupancy and equipment
expenses and $24.4 million higher brokerage and exchange fees. Compensation
costs for the first nine months of 1998 included a $29.0 million one-time
provision for costs associated primarily with DLJ's plans for significant
expansion in Europe.
DLJ enters into certain contractual agreements referred to as derivatives or
off-balance-sheet financial instruments involving options, futures and forwards,
and swap agreements. Substantially all of DLJ's activities related to
derivatives are, by their nature, trading activities which are primarily for the
purpose of customer accommodations. DLJ has focused its derivative activities on
writing OTC option contracts to accommodate its customers' needs, trading in
forward contracts in U.S. government and agency issued or guaranteed securities,
23
<PAGE>
foreign currencies, trading in futures contracts on equity based indices,
interest rate instruments and currencies and entering into swap transactions.
DLJ's involvement in commodity derivative instruments is not significant. As
part of DLJ's trading activities, including trading activities in the related
cash instruments, DLJ enters into forward and futures contracts primarily
involving securities, foreign currencies, indices and forward rate agreements,
as well as options on futures contracts. Such forward and futures contracts are
entered into as part of DLJ's covering transactions and are generally not used
for speculative purposes. DLJ enters into swap agreements to manage foreign
currency, interest rate and equity risk.
Revenues from option contracts (net of related interest expense) were
approximately $84.9 million and $51.5 million for the first nine months of 1998
and 1997, respectively. Option writing revenues are primarily from the
amortization of option premiums. The notional value of written options contracts
outstanding was approximately $9.0 billion and $5.8 billion at September 30,
1998 and 1997, respectively. The overall increase in the notional value of all
options was primarily due to increases in customer activity related to U.S.
government and mortgage-backed securities and currency forward contracts. Such
written options contracts are substantially covered by various financial
instruments that DLJ had purchased or sold as principal. Net trading losses on
forward contracts were $21.9 million and $38.2 million and net trading losses on
futures contracts were $64.7 million and $33.3 million for the first nine months
of 1998 and 1997, respectively. The notional contract and market values of the
forward and futures contracts at September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
---------------------------------- -----------------------------------
Purchases Sales Purchases Sales
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Forward Contracts
(Notional Contract Value).............. $ 39,729 $ 42,528 $ 19,899 $ 30,769
=============== =============== =============== ===============
Futures Contracts and Options on
Futures Contracts (Market Value)....... $ 1,393 $ 2,588 $ 1,724 $ 2,664
=============== =============== =============== ===============
</TABLE>
The increase in the notional value of the forward contracts was attributed
primarily to foreign currency contracts entered into by the newly formed foreign
exchange desk in third quarter 1998. The notional (contract) value of swap
agreements was approximately $6.0 billion at September 30, 1998. DLJ's
involvement in swap contracts at September 30, 1997 was not significant.
The notional or contract amounts indicate the extent of DLJ's involvement in the
derivative instruments. They do not measure DLJ's exposure to market or credit
risk and do not represent the future cash requirements of such contracts.
DLJ's trading VAR was approximately $23 million and $11 million at September 30,
1998 and December 31, 1997, respectively. The value at risk increase at
September 30, 1998 is due to the dramatic increase in volatility across a broad
range of financial instruments. DLJ's VAR for non-trading market risk sensitive
instruments is not significant.
Alliance - Alliance's pre-tax earnings from continuing operations for the first
nine months of 1998 were $244.8 million, an increase from earnings of $58.7
million from the prior year's comparable period. Revenues totaled $971.3 million
for the first nine months of 1998, an increase of $275.8 million from the
comparable period in 1997, due to increased investment advisory and service
fees. Alliance's costs and expenses increased $87.2 million for the first nine
months of 1998 as the effect of the abovementioned $120.9 million writedown of
intangible assets in 1997 was more than offset by higher promotion and servicing
expenses of $111.3 million, an increase of $59.8 million in employee
compensation and benefits and higher general and administrative expenses
including costs related to Year 2000 compliance.
24
<PAGE>
Fees From Assets Under Management - As the following table illustrates, third
party clients represent the primary source of revenues and earnings.
<TABLE>
<CAPTION>
Fees and Assets Under Management
(In Millions)
At or For the
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Fees:
Third Party
Unaffiliated third parties................ $ 247.0 $ 182.4 $ 742.2 $ 553.6
Separate Accounts......................... 24.0 22.0 72.5 58.2
The Equitable............................... 11.1 12.0 36.3 62.6
--------------- ---------------- --------------- ---------------
Total......................................... $ 282.1 $ 216.4 $ 851.0 $ 674.4
=============== ================ =============== ===============
Assets Under Management:
Third Party
Unaffiliated third parties................ $ 212,469 $ 178,027
Separate Accounts......................... 32,946 34,451
The Equitable............................... 59,346 60,242
--------------- ---------------
Total......................................... $ 304,761 $ 272,720
=============== ===============
</TABLE>
Fees from assets under management increased for the first nine months of 1998
from the comparable 1997 period principally as a result of growth in assets
under management for third parties. Alliance's third party assets under
management increased by $25.2 billion from the September 30, 1997 total
principally due to mutual fund sales and market appreciation but declined $20.5
billion compared to the June 30, 1998 total primarily due to negative quarterly
market performance.
For the first nine months of 1997, fees received for assets under management by
ERE totaled $94.1 million, of which $63.7 million was received from third
parties.
CONTINUING OPERATIONS INVESTMENT PORTFOLIO
The continuing operations investment portfolio is composed of the General
Account investment portfolio and investment assets of the Holding Company Group.
The General Account's portfolio is discussed first, followed by a separate
discussion on the Holding Company Group investments.
25
<PAGE>
General Account Investment Portfolio
The discussion of the General Account portfolio analyzes the results of major
investment asset categories, including the Closed Block's investments. The
following table reconciles the consolidated balance sheet asset amounts to
General Account Investment Assets.
<TABLE>
<CAPTION>
General Account Investment Assets
Carrying Values at September 30, 1998
(In Millions)
General
Balance Holding Account
Sheet Closed Company Investment
Balance Sheet Captions: Total Block Other Group Assets(1)
- ----------------------------------- ---------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Fixed maturities:
Available for sale(2)........... $ 21,148.8 $ 4,458.2 $ (133.5) $ 662.4 $ 25,078.1
Held to maturity(2)............. 262.0 - - 126.5 135.5
Trading account securities........ 16,756.0 - 16,756.0 - -
Securities purchased under
resale agreements............... 20,845.4 - 20,845.4 - -
Mortgage loans on real estate..... 2,552.0 1,577.4 - - 4,129.4
Equity real estate................ 2,106.5 132.6 (3.0) - 2,242.1
Policy loans...................... 2,050.2 1,652.4 - - 3,702.6
Other equity investments.......... 1,138.3 64.8 455.0 .1 748.0
Other invested assets............. 1,002.0 (131.0) 227.5 188.0 455.5
---------------- ------------- --------------- -------------- -------------
Total investments............... 67,861.2 7,754.4 38,147.4 977.0 36,491.2
Cash and cash equivalents......... 1,356.2 6.9 1,187.9 (138.2) 313.4
---------------- ------------- --------------- -------------- -------------
Total............................. $ 69,217.4 $ 7,761.3 $ 39,335.3 $ 838.8 $ 36,804.6
================ ============= =============== ============== =============
<FN>
(1) General Account Investment Assets are computed by adding the amounts in the
Balance Sheet and Closed Block columns and subtracting the Other and
Holding Company Group amounts.
(2) At September 30, 1998, the amortized cost of the General Account's
available for sale and held to maturity fixed maturity portfolios was
$23.85 billion and $135.5 million, respectively, compared with an estimated
market value of $25.08 billion and $135.5 million, respectively.
</FN>
</TABLE>
The General Account Investment Assets presentation set forth in the following
pages includes the investments of the Closed Block on a line-by-line basis.
Management believes it is appropriate to discuss the information on a combined
basis in view of the similar asset quality characteristics of major asset
categories in the portfolios.
26
<PAGE>
General Account Investment Assets by Category
The following table shows the amortized cost, valuation allowances and the net
amortized cost of the major categories of General Account Investment Assets at
September 30, 1998 and the net amortized cost at December 31, 1997.
<TABLE>
<CAPTION>
General Account Investment Assets
(Dollars In Millions)
September 30, 1998 December 31, 1997
----------------------------------------------------------- -----------------------------
% of % of
Net Total Net Net Total Net
Amortized Valuation Amortized Amortized Amortized Amortized
Cost Allowances Cost Cost Cost Cost
--------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities(1).......... $ 23,984.7 $ - $ 23,984.7 67.4% $ 22,914.5 65.0%
Mortgages.................... 4,166.9 37.5 4,129.4 11.6 3,953.0 11.2
Equity real estate........... 2,520.3 278.2 2,242.1 6.3 2,637.8 7.5
Other equity investments..... 748.0 - 748.0 2.1 1,037.5 2.9
Policy loans................. 3,702.6 - 3,702.6 10.4 4,123.1 11.7
Cash and short-term
investments................ 768.9 - 768.9 2.2 607.6 1.7
--------------- ------------- ------------- ------------- ------------- -------------
Total........................ $ 35,891.4 $ 315.7 $ 35,575.7 100.0% $ 35,273.5 100.0%
=============== ============= ============= ============= ============= =============
<FN>
(1) Excludes unrealized gains of $1.23 billion and $1.07 billion in fixed
maturities classified as available for sale at September 30, 1998 and
December 31, 1997, respectively.
</FN>
</TABLE>
27
<PAGE>
Investment Results of General Account Investment Assets
<TABLE>
<CAPTION>
Investment Results by Asset Category
(Dollars In Millions)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------------- --------------------------------------------------
1998 1997 1998 1997
------------------------ ------------------------ ------------------------ ------------------------
(1) (1) (1) (1)
Yield Amount Yield Amount Yield Amount Yield Amount
---------- ------------- ---------- ------------- --------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Income.............. 7.77% $ 464.8 7.88% $ 457.7 7.81% $ 1,382.1 7.93% $ 1,340.1
Investment
Gains/(Losses).... (0.66)% (39.5) 0.64% 37.4 (0.02)% (2.8) 0.49% 82.8
---------- ------------- ---------- ------------- -------- --------------- ---------- -------------
Total............... 7.11% $ 425.3 8.52% $ 495.1 7.79% $ 1,379.3 8.42% $ 1,422.9
Ending Assets....... $ 23,984.7 $ 23,942.2 $ 23,984.7 $ 23,942.2
Mortgages:
Income.............. 8.96% $ 90.4 8.81% $ 90.0 9.15% $ 273.8 9.35% $ 298.5
Investment
Gains/(Losses).... 0.13% 1.3 (0.54)% (5.5) (0.11)% (3.1) (0.26)% (8.5)
---------- ------------- ---------- ------------- --------- --------------- --------- -------------
Total............... 9.09% $ 91.7 8.27% $ 84.5 9.04% $ 270.7 9.09% $ 290.0
Ending Assets....... $ 4,129.4 $ 3,998.1 $ 4,129.4 $ 3,998.1
Equity Real
Estate (2):
Income.............. 8.83% $ 42.2 2.55% $ 17.1 7.07% $ 104.3 2.50% $ 50.7
Investment
Gains/(Losses).... 5.40% 25.8 (7.31)% (49.1) 2.20% 32.3 (3.15)% (63.8)
---------- ------------- ----------- ------------- --------- -------------- ---------- -------------
Total............... 14.23% $ 68.0 (4.76)% $ (32.0) 9.27% $ 136.6 (0.65)% $ (13.1)
Ending Assets....... $ 1,845.4 $ 2,602.2 $ 1,845.4 $ 2,602.2
Other Equity
Investments:
Income.............. (1.59)% $ (3.7) 23.12% $ 58.0 10.18% $ 75.9 15.90% $ 116.3
Investment
Gains/(Losses).... 1.42% 3.3 1.32% 3.3 4.93% 36.8 1.33% 9.7
---------- ------------- ----------- ------------- -------- --------------- ---------- -------------
Total............... (0.17)% $ (0.4) 24.44% $ 61.3 15.11% $ 112.7 17.23% $ 126.0
Ending Assets....... $ 748.0 $ 1,021.4 $ 748.0 $ 1,021.4
Policy Loans:
Income.............. 6.57% $ 60.5 7.02% $ 72.2 6.63% $ 188.0 6.97% $ 212.3
Ending Assets....... $ 3,702.6 $ 4,152.0 $ 3,702.6 $ 4,152.0
Cash and Short-term
Investments:
Income.............. 7.68% $ 12.7 7.21% $ 13.5 9.83% $ 49.8 8.23% $ 37.8
Ending Assets....... $ 768.9 $ 968.1 $ 768.9 $ 968.1
Total:
Income.............. 7.59% $ 666.9 7.90% $ 708.5 7.90% $ 2,073.9 7.80% $ 2,055.7
Investment
Gains/(Losses).... (0.10)% (9.1) (0.16)% (13.9) 0.24% 63.2 0.08% 20.2
---------- ------------- ----------- ------------- --------- -------------- ---------- -------------
Total(3)............ 7.49% $ 657.8 7.74% $ 694.6 8.14% $ 2,137.1 7.88% $ 2,075.9
Ending Assets....... $ 35,179.0 $ 36,684.0 $ 35,179.0 $ 36,684.0
<FN>
(1) Yields have been annualized and calculated based on the quarterly average
asset carrying values excluding unrealized gains (losses) in fixed
maturities. Annualized yields are not necessarily indicative of a full
year's results.
28
<PAGE>
(2) Equity real estate carrying values are shown net of third party debt and
minority interest in real estate. Equity real estate income is shown net of
operating expenses, depreciation, third party interest expense and minority
interest. Depreciation totaled $5.9 million, $21.0 million, $25.3 million
and $62.9 million for the three months and the nine months ended September
30, 1998 and 1997, respectively.
(3) Total yields are shown before deducting investment fees paid to investment
advisors. These fees include asset management, acquisition, disposition,
accounting and legal fees. If investment fees had been deducted, total
yields would have been 7.26%, 7.47%, 7.89% and 7.60% for the three months
and the nine months ended September 30, 1998 and 1997, respectively.
</FN>
</TABLE>
Writedowns on fixed maturities were $70.3 million and $15.0 million for the
first nine months of 1998 and 1997, respectively; writedowns on equity real
estate during the first nine months of 1997 were $4.1 million. The following
table shows asset valuation allowances and additions to and deductions from such
allowances for mortgages and equity real estate for the first nine months of
1998 and 1997.
<TABLE>
<CAPTION>
General Account Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
--------------- --------------- --------------
<S> <C> <C> <C>
September 30, 1998
Beginning balances............................................ $ 74.3 $ 345.5 $ 419.8
Additions..................................................... 14.5 55.1 69.6
Deductions(1)................................................. (51.3) (122.4) (173.7)
--------------- --------------- --------------
Ending Balances............................................... $ 37.5 $ 278.2 $ 315.7
=============== =============== ==============
September 30, 1997
Beginning balances............................................ $ 64.2 $ 90.4 $ 154.6
Additions..................................................... 34.8 72.0 106.8
Deductions(1)................................................. (33.8) (36.7) (70.5)
--------------- --------------- --------------
Ending Balances............................................... $ 65.2 $ 125.7 $ 190.9
=============== =============== ==============
<FN>
(1) Primarily reflected releases of allowances due to asset dispositions and
writedowns.
</FN>
</TABLE>
Fixed Maturities. Fixed maturities consist of publicly traded debt securities,
privately placed debt securities and small amounts of redeemable preferred
stock, which represented 74.8%, 24.4% and 0.8%, respectively, of the amortized
cost of this asset category at September 30, 1998.
<TABLE>
<CAPTION>
Fixed Maturities By Credit Quality
(Dollars In Millions)
September 30, 1998 December 31, 1997
Rating Agency --------------------------------------- -----------------------------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
- ---------- ---------------------- --------------- --------- ------------- ----------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
1-2 Aaa/Aa/A and Baa...... $ 20,566.2 85.7% $ 22,044.9 $ 19,488.9 85.0% $ 20,425.3
3-6 Ba and lower.......... 3,227.2(1) 13.5 2,937.3 3,294.9(2) 14.4 3,395.4
------------ ---------- --------------- ------------ --------- -------------
Subtotal........................ 23,793.4 99.2 24,982.2 22,783.8 99.4 23,820.7
Redeemable preferred stock
and other..................... 191.3 0.8 231.4 130.7 0.6 166.2
------------ ---------- --------------- ------------ ------------- -------------
Total........................... $ 23,984.7 100.0% $ 25,213.6 $ 22,914.5 100.0% $ 23,986.9
============ ========== =============== ============ ============= =============
<FN>
(1) Includes Class B Notes with an amortized cost of $85.6 million, eliminated in consolidation.
(2) Includes Class B Notes with an amortized cost of $95.2 million, eliminated in consolidation.
</FN>
</TABLE>
29
<PAGE>
At September 30, 1998, The Equitable held CMOs with an amortized cost of $2.26
billion, including $2.13 billion in publicly traded CMOs. In addition, at
September 30, 1998, The Equitable held $2.89 billion of mortgage pass-through
securities (GNMA, FNMA or FHLMC securities) and also held $1.48 billion of
public and private asset backed securities, primarily backed by home equity
mortgages, airline and other equipment, and credit card receivables.
<TABLE>
<CAPTION>
Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
September 30, December 31,
1998 1997
---------------- -----------------
<S> <C> <C>
FIXED MATURITIES.............................................................. $ 23,984.7 $ 22,914.5
Problem fixed maturities...................................................... 93.8 31.0
Potential problem fixed maturities............................................ 54.4 17.9
Restructured fixed maturities(1).............................................. - 1.8
<FN>
(1) Excludes restructured fixed maturities of $2.5 million that are shown as
problems at both September 30, 1998 and December 31, 1997.
</FN>
</TABLE>
The $62.8 million increase in problem fixed maturities from the December 31,
1997 total principally resulted from a $48.3 million increase in the private
high yield security category and a $13.2 million increase for emerging market
securities. The increase of $36.5 million in potential problem fixed maturities
was primarily in the public high yield category.
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
At September 30, 1998, commercial mortgages totaled $2.37 billion (56.8% of the
amortized cost of the category), agricultural loans were $1.80 billion (43.2%)
and residential loans were $1.6 million (0.0%).
<TABLE>
<CAPTION>
Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
September 30, December 31,
1998 1997
---------------- -----------------
<S> <C> <C>
COMMERCIAL MORTGAGES.......................................................... $ 2,366.0 $ 2,305.8
Problem commercial mortgages.................................................. - 19.3
Potential problem commercial mortgages........................................ 148.1 180.9
Restructured commercial mortgages(1).......................................... 120.5 194.9
AGRICULTURAL MORTGAGES........................................................ $ 1,799.3 $ 1,719.2
Problem agricultural mortgages................................................ 13.9 12.2
Potential problem agricultural mortgages...................................... - -
Restructured agricultural mortgages........................................... 4.7 1.1
<FN>
(1) Excludes $19.9 million and $57.9 million of restructured commercial
mortgages that are shown as potential problems at September 30, 1998 and
December 31, 1997, respectively.
</FN>
</TABLE>
Potential problem loans declined primarily due to foreclosures. During the first
nine months of 1998, the amortized cost of foreclosed commercial mortgages
totaled $38.1 million with a $33.5 million reduction in amortized cost required
at the time of foreclosure.
30
<PAGE>
The original weighted average coupon rate on the $120.5 million of restructured
mortgages was 8.7%. As a result of these restructurings, the restructured
weighted average coupon rate was 7.6% and the restructured weighted average cash
payment rate was 8.3%. The foregone interest on restructured commercial
mortgages (including restructured commercial mortgages presented as problem or
potential problem commercial mortgages) for the first nine months of 1998 was
$1.1 million.
As of September 30, 1998, there were no problem commercial mortgages. The
distribution of potential problem commercial mortgages by property type was:
multi-family ($114.9 million or 77.6%), retail ($18.7 million or 12.6%), hotel
($12.8 million or 8.6%), industrial ($1.4 million or 1.0%) and office ($0.3
million or 0.2%). By state, their distribution was: New York ($63.8 million or
43.1%), Massachusetts ($26.8 million or 18.1%), Puerto Rico ($18.8 million or
12.7%) and Pennsylvania ($18.0 million or 12.2%). No other state had 5.0% or
more of the total.
At September 30, 1998 and 1997, management identified impaired mortgage loans
with carrying values of $161.3 million and $249.7 million, respectively. The
provision for losses for these impaired mortgage loans was $32.5 million and
$60.9 million at September 30, 1998 and 1997, respectively. Income earned on
these loans in the first nine months of 1998 and 1997 was $13.1 million and
$19.9 million, respectively, including cash received of $12.9 million and $17.6
million, respectively.
For the first nine months of 1998, scheduled principal amortization payments and
prepayments on commercial mortgage loans received aggregated $335.8 million. In
addition, during the first nine months of 1998, $135.7 million of commercial
mortgage loan maturity payments were scheduled, of which $64.1 million were paid
as due. Of the amount not paid, $69.0 million were granted short term extensions
of up to nine months and $2.2 million were extended for a weighted average of
2.5 years at a weighted average interest rate of 8.0%.
Equity Real Estate. As of September 30, 1998, on the basis of amortized cost,
the equity real estate category included $1.62 billion (or 64.4%) acquired as
investment real estate and $897.1 million (or 35.6%) acquired through or in lieu
of foreclosure (including in-substance foreclosures).
Management announced in January 1998 plans to accelerate equity real estate
sales over the next twelve to fifteen months. During the first nine months of
1998 and 1997, respectively, proceeds from the sale of equity real estate
totaled $483.2 million and $228.9 million, with gains of $86.8 million and $13.5
million. At September 30, 1998, equity real estate with a carrying value of
$1.19 billion was classified as held for sale ($1.53 billion including
discontinued operations' total).
At September 30, 1998, the vacancy rate for The Equitable's office properties
was 9.1% in total, with a vacancy rate of 6.2% for properties acquired as
investment real estate and 19.4% for properties acquired through foreclosure.
The national commercial office vacancy rate was 9.2% (as of June 30, 1998) as
measured by CB Commercial.
Other Equity Investments. Other equity investments consist of LBO, mezzanine,
venture capital and other limited partnership interests ($446.3 million or 59.7%
of the amortized cost of this portfolio at September 30, 1998), alternative
limited partnerships ($163.1 million or 21.8%) and common stock and other equity
securities ($138.6 million or 18.5%). Alternative funds utilize trading
strategies that may be leveraged, and attempt to protect against market risk
through a variety of methods, including short sales, financial futures, options
and other derivative instruments. Other equity investments can create
significant volatility in investment income since they predominantly are
accounted for in accordance with the equity method which treats increases and
decreases in the estimated fair value of the underlying assets (or allocable
portion thereof, in the case of partnerships), whether realized or unrealized,
as investment income or loss to The Equitable. Though not reported in General
Account Investment Assets, the excess of Separate Account assets over Separate
Accounts liabilities at September 30, 1998 of $91.3 million represented an
investment by the General Account principally in equity securities. During the
third quarter of 1998, $373.6 million of amounts invested in the Separate
Account equity funds were withdrawn and the proceeds were reinvested in General
Account Investment Assets. As demonstrated by the market volatility and negative
returns experienced in third quarter 1998, returns on equity investments are
very volatile and investment results for any period are not representative of
any other period.
31
<PAGE>
Holding Company Group Investment Portfolio - Continuing Operations
For the first nine months of 1998, Holding Company Group investment results were
$43.1 million, as compared to $38.2 million in the year earlier period. The
increase principally was due to higher investment income on the Holding
Company's larger fixed maturities portfolio including $591.1 million received in
April 1998 from the issuance of senior notes and debentures offset by $145.0
million used to repurchase treasury shares in third quarter 1998.
At September 30, 1998, the Holding Company Group investment portfolio's $838.8
million carrying value was made up of $788.9 million of fixed maturities ($637.4
million with an NAIC 1 rating), $49.8 million of cash and short-term investments
and $0.1 million of other equity investments. At December 31, 1997, the
portfolio's carrying value was $524.0 million, which included $490.6 million of
fixed maturities ($418.1 million with an NAIC 1 or 2 rating), $24.3 million of
cash and short-term investments and $9.1 million of other equity investments.
YEAR 2000
Year 2000 compliance efforts continue at Equitable Life, DLJ and Alliance.
Insurance Operations - Equitable Life began addressing the Year 2000 issue in
1995. In addition to significant internal resources, third parties have been
assisting in remediating and testing computer hardware and software ("computer
systems") and embedded systems and in overall project control. The following
process has been undertaken:
(1) Equitable Life established a Year 2000 project office, which developed a
strategic approach and created broad awareness of the Year 2000 issues at
Equitable Life through meetings with the Audit Committee of the Board of
Directors and executive and senior management, presentations to business
areas and employee newsletters.
(2) Corporate-developed computer systems were inventoried and assessed for Year
2000 compliance. Third party providers of computer systems and services,
including embedded systems, were contacted. Approximately 60% of those
contacted have responded that their systems or services are or will be Year
2000 compliant. Those who have not responded have been contacted a second
time.
(3) Management expects the remediation or replacement of mission-critical
corporate-developed computer systems to be substantially complete by year
end 1998 and expects the work of remediating or replacing all non-compliant
corporate-developed systems to be substantially completed by June 30, 1999.
Management continues to monitor Year 2000 compliance by third party
providers of computer systems, including embedded systems, and services.
Management believes it is on schedule for such systems and services,
including those considered mission-critical, to be confirmed as Year 2000
compliant, remediated, replaced or the subject of contingency plans, by the
end of second quarter 1999.
(4) Year 2000 compliance testing is an ongoing three-part process: after a
system has been modified, it is tested to determine if it still performs
its intended business function correctly; next, it undergoes a simulation
test using dates occurring after December 31, 1999; last, integrated
systems tests are scheduled to verify that the systems continue to work
together with the computers' internal clocks set to post December 31, 1999
dates. All significant automated data interfaces with third parties will
also be tested for Year 2000 compliance, including those with Lend Lease
and Alliance, who provide material investment management and accounting
services for Equitable Life's general and certain of its separate accounts.
Mission-critical systems will undergo date simulation testing beginning in
first quarter 1999 with initial integrated systems testing of the Year 2000
compliance in the first half of 1999. Such testing will continue throughout
1999 as needed. Equitable Life may retain third parties to assist with
selective verification of the Year 2000 compliance of certain systems.
(5) Existing business continuity and disaster recovery plans cover certain
categories of contingencies that could arise as a result of Year 2000
related failures. These plans are being supplemented to address
contingencies unique to the millennium change. Management anticipates that
Year 2000 specific contingency plans will be developed by the end of second
quarter 1999. Equitable Life may retain third parties to assist with
planning for contingencies.
32
<PAGE>
Equitable Life's Year 2000 compliance project is currently estimated to cost $30
million through the end of 1999, of which approximately $23.4 million is
expected to have been incurred through the end of 1998. Costs will be paid out
of operating funds. Equitable Life's new computer application development and
procurement have not been subject to any delay caused in whole or part by Year
2000 efforts that is expected to have a material adverse effect on The
Equitable's financial condition or results of operations.
Investment Subsidiaries - DLJ and Alliance's Year 2000 related activities and
progress to date are summarized below. The costs of their Year 2000 efforts are
being funded by operating cash flows with costs being expensed as incurred. For
further information, see their respective filings on Form 10-Q for the quarter
ended September 30, 1998.
DLJ - As a result of DLJ's recent business expansion and headquarters' move,
many of its computer systems are Year 2000 compliant. Year 2000 project plans
have been developed and management oversight groups and project managers monitor
DLJ's decentralized implementation of those plans for its information technology
("IT") and non-IT systems. At September 30, 1998, these systems have been
inventoried and non-compliant mission-critical systems have been targeted first
for remediation. DLJ has retained several major consulting firms with expertise
in advising corporations on Year 2000 issues and their potential impact. The
correspondent clearing business expects to have all non-compliant systems
renovated, tested and returned to production by December 31, 1998. All other
mission-critical systems are expected to complete that process by March 31,
1999, followed by non-mission-critical systems by June 30, 1999. None of DLJ's
other IT projects have been delayed as a result of the Year 2000 project. DLJ
has identified all significant third parties and has received assurances they
are taking the necessary steps to prepare for the Year 2000. Additionally, DLJ
participates in testing sponsored by a securities industry association. To date,
DLJ has achieved successful results in each of the tests in which it has
participated and, as noted above, all such testing should be completed by June
30, 1999. Testing of internal and external systems will continue throughout 1999
to ensure all remediated systems remain compliant.
DLJ currently estimates its Year 2000 costs will range between $85 million and
$90 million, with $71 million incurred through September 30, 1998. While its
correspondent clearance business has a formal general contingency plan which
covers a variety of events, DLJ expects to develop a formal Year 2000 specific
contingency plan in first quarter 1999.
Alliance - During 1997, Alliance began a formal Year 2000 initiative, managed by
a Year 2000 project office and focusing on both IT and non-IT systems. Alliance
has retained a number of consulting firms with expertise in advising and
assisting clients with regard to Year 2000 issues. By June 30, 1998, Alliance
had completed an inventory and assessment of its domestic and international
computer systems, identified its mission-critical and non-mission-critical
systems, and determined which of these systems is not Year 2000 compliant.
Alliance has remediated most of its non-compliant mission-critical systems and
expects the remediation phase for all mission-critical systems will be complete
by February 28, 1999. Remediation of non-mission-critical systems is expected to
be completed by June 30, 1999. Alliance has completed the business functionality
and the post-December 31, 1999 testing for approximately 65% of its
mission-critical systems and approximately 70% of its non-mission-critical
systems. Full integration testing of all remediated systems and tests of
interfaces with third party suppliers will begin in first quarter 1999 and
continue throughout that year. Alliance is inventorying, evaluating and testing
its technical infrastructure and corporate facilities and expects them to be
fully operable in the Year 2000. Certain other planned IT projects have been
deferred until after the Year 2000 initiative is completed. Such delay is not
expected to have a material adverse effect on Alliance's financial condition or
results of operations.
Alliance estimates its cost of the Year 2000 initiative will range between $40
million and $45 million. Such costs consist principally of remediation costs and
costs to develop a formal Year 2000 specific contingency plan. Through third
quarter 1998, Alliance has incurred approximately $17 million of those costs.
33
<PAGE>
Risks - There are many risks associated with Year 2000 issues, including the
risk that The Equitable's computer systems will not operate as intended. There
can be no assurance that the systems, services and products of third parties
will be Year 2000 compliant. Likewise, there can be no assurance the compliance
schedules outlined above will be met.
Any significant unresolved difficulties related to the Year 2000 compliance
initiatives could result in an interruption in, or a failure of, normal business
activities or operations, or the incurrence of unanticipated expenses related to
resolving such difficulties, regulatory actions, damage to The Equitable's
franchise and legal liabilities and, accordingly, could have a material adverse
effect on The Equitable's business operations and financial results. Due to the
pervasive nature, the external as well as internal interdependencies and the
inherent risks and uncertainties of Year 2000 issues, The Equitable cannot
determine which risks are most reasonably likely to occur, if any, nor the
effects of any particular failure to be Year 2000 compliant.
The forward-looking statements under "Year 2000" should be read in conjunction
with the disclosure set forth under "Forward-Looking Statements" on page 36. To
the fullest extent permitted by law, the foregoing Year 2000 discussion is a
"Year 2000 Readiness Disclosure" within the meaning of The Year 2000 Information
and Readiness Disclosure Act, 15 U.S.C. Sec. 1 (1998).
EURO CURRENCY
On January 1, 1999, conversion rates of the national currencies of eleven
European Union members will be fixed against the common currency, called the
Euro. DLJ is assessing the impact of the Euro conversion and expects to
implement the necessary changes to mitigate the risks associated with the
conversion by December 31, 1998. Alliance has assessed its internally developed
and purchased applications to determine the changes needed to process Euro
denominated transactions. Alliance also expects the requisite modifications to
be completed and tested by December 31, 1998. Should Alliance's computer
applications be unable to process Euro sensitive information accurately in 1999,
its ability to conduct its operations could be significantly impaired. Costs
associated with the Euro conversion projects are not expected to be material to
The Equitable's financial results.
LIQUIDITY AND CAPITAL RESOURCES
In April 1998, the Holding Company completed an offering under its existing
shelf registration of $250.0 million 6 1/2% Senior Notes due 2008 and $350.0
million 7% Senior Debentures due 2028 (together the "1998 Senior Debt"),
resulting in net proceeds of $591.1 million to be used for general corporate
purposes. Pre-tax debt service on the 1998 Senior Debt is expected to be
approximately $29.9 million in 1998, and approximately $40.8 million per annum
thereafter.
On May 13, 1998, the Holding Company's Board of Directors authorized a stock
repurchase program pursuant to which the Holding Company may repurchase up to 8
million shares of its Common Stock from time to time in the open market or
through privately negotiated transactions. In September 1998, the Board
increased the share authorization to 15 million. At September 30, 1998, the
Holding Company had repurchased 2.6 million shares of Common Stock at a cost of
$145.0 million. In connection with its stock repurchase program, during second
quarter the Holding Company privately placed put options entitling the holder to
sell up to 1 million shares of Common Stock to the Holding Company at specified
prices upon exercise of the options. Upon exercise of a portion of the options,
The Equitable purchased 200,000 shares for $13.2 million. The remaining 800,000
of such options were outstanding at September 30, 1998.
During the first nine months of 1998, DLJ issued $650.0 million of 6 1/2% senior
notes, $450.0 million aggregate principal amount of senior secured notes and
$250.0 million medium-term notes. In addition, DLJ repaid the $325.0 million
which had been outstanding under its senior subordinated revolving credit
agreement and terminated the related facility.
34
<PAGE>
In July 1998, DLJ sold an aggregate of 5 million shares of newly issued common
stock to the Holding Company (1.8 million shares for $110.0 million), Equitable
Life (1.5 million shares for $90.0 million) and AXA (1.7 million shares for
$100.0 million). On an undiluted basis, The Equitable's ownership percentage was
approximately 73% following these purchases.
Equitable Life has a commercial paper program with an issue limit of up to
$500.0 million. This program is available for general corporate purposes and is
supported by Equitable Life's existing $350.0 million bank credit facility,
which expires in September 2000. Equitable Life uses this program from time to
time in its liquidity management. At September 30, 1998, $125.0 million was
outstanding under the commercial paper program; no amount was outstanding under
the revolving credit facility.
On March 16, 1998, members of the NAIC approved its Codification of Statutory
Accounting Principles ("Codification") project. Codification provides regulators
and insurers with uniform statutory guidance, addressing areas where statutory
accounting previously was silent and changing certain existing statutory
positions. Equitable Life will be subject to Codification to the extent and in
the form adopted in New York State, which would require action by both the New
York legislature and the New York Insurance Department. It is not possible to
predict whether, in what form, or when Codification will be adopted in New York,
and accordingly it is not possible to predict the effect of Codification on
Equitable Life.
Consolidated Cash Flows
The net cash used by operating activities was $2.06 billion for the first nine
months of 1998 compared to $3.05 billion for the same period in 1997. Cash used
by operating activities in the respective 1998 and 1997 periods principally were
attributable to the respective $2.37 billion and $3.78 billion net change in
trading activities and broker-dealer related receivables/payables at DLJ
reflecting increases in operating assets.
Net cash used by investing activities was $411.0 million for the first nine
months of 1998 as compared to $193.1 million for the same period in 1997. In the
1998 period, investment purchases exceeded sales, maturities and repayments by
$387.8 million. Discontinued operations repaid $300.0 million of loans from
continuing operations during the first nine months of 1998. During the
comparable period in 1997, investment purchases exceeded sales, maturities and
repayments by $518.0 million. The ERE sale produced net proceeds of
approximately $261.0 million. Discontinued operations reduced its outstanding
loans from continuing operations by $336.2 million during the first nine months
of 1997.
Net cash provided by financing activities was $3.23 billion for the first nine
months of 1998 as compared to $3.93 billion in the first nine months of 1997. In
the first nine months of 1998, withdrawals from General Account policyholders'
account balances exceeded deposits by $247.4 million. During the first nine
months of 1998, cash provided by the issuance of long-term debt totaled $1.97
billion principally due to the $1.10 billion and $600.0 million of senior notes
issued by DLJ and the Holding Company, respectively. Also in the 1998 period,
there was a net increase of $1.98 billion in short-term financing, principally
at DLJ, partially offset by $495.5 million from repayment of long-term debt,
principally DLJ's senior subordinate revolving credit. Net cash provided by
financing activities during the first nine months of 1997 primarily resulted
from a $3.65 billion increase in short-term financings, principally due to net
repurchase agreement activity. There was a net increase of long-term debt of
$687.9 million primarily due to new debt at DLJ. Withdrawals from General
Account policyholders' account balances exceeded deposits by $390.7 million
during the nine months ended September 30, 1997.
The operating, investing and financing activities described above resulted in an
increase in cash and cash equivalents during the first nine months of 1998 of
$758.8 million to $1.36 billion.
35
<PAGE>
FORWARD-LOOKING STATEMENTS
The Equitable's management has made in this report, and from time to time may
make in its public filings and press releases as well as in oral presentations
and discussions, forward-looking statements concerning The Equitable's
operations, economic performance and financial condition. Forward-looking
statements include, among other things, discussions concerning The Equitable's
potential exposure to market risks, as well as statements expressing
management's expectations, beliefs, estimates, forecasts, projections and
assumptions, as indicated by words such as "believes," "estimates," "intends,"
"anticipates," "expects," "projects," "should," "probably," "risk," "target,"
"goals," "objectives," or similar expressions. The Equitable claims the
protection afforded by the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995, and assumes no duty to
update any forward-looking statement. Forward-looking statements are subject to
risks and uncertainties. Actual results could differ materially from those
anticipated by forward-looking statements due to a number of important factors
including those discussed elsewhere in this report and in The Equitable's other
public filings, press releases, oral presentations and discussions and the
following: (i) the intensity of competition from other financial institutions;
(ii) secular trends and The Equitable's mortality, morbidity, persistency and
claims experience; (iii) The Equitable's ability to develop, distribute and
administer competitive products and services in a timely, cost-effective manner;
(iv) The Equitable's visibility in the marketplace and its financial and claims
paying ratings; (v) the effect of changes in laws and regulations affecting The
Equitable's businesses, including changes in tax laws affecting insurance and
annuity products; (vi) the volatile nature of the securities business, the
future results of DLJ and Alliance and the potential losses that could result
from DLJ's merchant banking activities as a result of its capital intensive
nature; (vii) market risks related to interest rates, equity prices,
derivatives, foreign currency exchange and credit; (viii) the volatility of
returns from The Equitable's other equity investments; (ix) The Equitable's
ability to address Year 2000 compliance and to develop information technology
and management information systems to support strategic goals while continuing
to control costs and expenses; (x) the costs of defending litigation and the
risk of unanticipated material adverse outcomes in such litigation; (xi) changes
in accounting and reporting practices; (xii) the performance of others on whom
The Equitable relies for distribution, investment management, reinsurance and
other services, and the Year 2000 compliance of such persons; (xiii) The
Equitable's access to adequate financing to support its future business; (xiv)
the effect of any future acquisitions and (xv) the risks associated with Year
2000 non-compliance by The Equitable and third parties, unanticipated costs
associated with Year 2000 compliance due to, among other things, the inability
to locate, correct and successfully test all relevant computer code according to
schedule, the continued availability of certain resources including personnel
and timely and accurate responses and corrections by third parties.
36
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There have been no new material legal proceedings and no material developments
in matters which were previously reported in the Registrant's Form 10-K for the
year ended December 31, 1997, except as set forth in Note 12 to the Registrant's
Unaudited Consolidated Financial Statements in Part I of this Form 10-Q for the
quarter ended September 30, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10.30 Description of the amendment to The Equitable
Companies Incorporated 1997 Stock Incentive
Plan, filed herewith
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Equitable Companies Incorporated has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: November 11, 1998 THE EQUITABLE COMPANIES INCORPORATED
By: /s/Stanley B. Tulin
-------------------------------------
Name: Stanley B. Tulin
Title: Executive Vice President and
Chief Financial Officer
Date: November 11, 1998 /s/Alvin H. Fenichel
-------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and
Controller
38
The Equitable Companies Incorporated 1997 Stock Incentive Plan was amended in
July 1998 to permit grants of stock options to agents who are classified as
full-time life insurance salespersons for certain federal tax purposes.
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